An airline decided to offer direct service from Akron to Clearwater beach, Flori
ID: 453258 • Letter: A
Question
An airline decided to offer direct service from Akron to Clearwater beach, Florida. Management must decide between full-price service using a company’s new fleet of jet aircraft and a discount-service using smaller capacity commuter planes. Management developed estimates of the contribution to profit for each type of service based upon two possible levels of demand for service on Clearwater beach: high, moderate, and low.
The following table shows the estimated quarterly profits (in thousands of dollars):
Demand for service
High
Medium
Low
Full price
900
760
–430
Discount
710
650
350
Service Demand for service High Medium Low Full price 900 760 –430 Discount 710 650 350 The probabilities for the demand is P(High) = 0.3, P(Medium) = 0.5, and P(Low) = 0.2, respectively.
a. What is the optimal decision strategy if perfect information were available?
b. What is the expected value for the decision strategy developed in part a?
c. Using the expected value approach, what is the recommended decision without perfect information? What is its expected value?
d. What is the expected value of perfect information?
Demand for service
High
Medium
Low
Full price
900
760
–430
Discount
710
650
350
Explanation / Answer
a. The optimal strategy when we have perfect information is
High- Full price
medium- Full price
Low- Discount
b. The expected value will be 0.3 X900 +0.5 X 760 +0.2 X350= 270+380+70= 720
c. The expected value of full price strategy = 0.3 X900 +0.5 X760 +0.2 X-430 =564
The expected value of discount =0.3*710+0.5*650+0.2*350=608
The recommended decision using expected value approach is provide discount which has expected value of 608
d. The expected value of perfect information is 720-608=112
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.